Budget 2024-25: 10 years of Modi Budgets: IBC a winner, bank privatisation still a work in progress

The Centre’s allocation for the mining sector increased over 90 percent to Rs 1,911.60 crore in FY24 amid privatisation and the rise in the use of minerals.

Over the last 10 years, the banking industry witnessed a mix of steps including the mega-merger of state-owned banks and aggressive bank account opening drive by banks under Jan Dhan Yojana and, more critically, the introduction of the Insolvency and Bankruptcy Code (IBC). However, privatisation of state-run banks—a key reform agenda promised by successive governments—remains a work in progress and an unfulfilled promise.

Here’s a detailed review of all the reforms in the banking sector in the last 10 years.

Formation of IBC

On February 25, 2015, in the Union Budget 2015-16, the then Finance Minister Arun Jaitley announced the formation of a comprehensive bankruptcy code of global standards. Further, Jaitley introduced the Insolvency and Bankruptcy Code, 2015, in the sixteenth Lok Sabha. To do a detailed analysis of the Code, a joint parliamentary committee was formed, which submitted a new draft of the bill on April 28, 2016. Later in 2016, the parliament passed the Insolvency and Bankruptcy Code (IBC) which was termed as a much-needed, long-awaited reform for the insolvency process in the country.

Also read: Exclusive| Former RBI Deputy Governor Shyamala Gopinath pitches for stronger IBC process

The Code aimed to expedite and simplify the process of bankruptcy proceedings alongside facilitating fair negotiations between the borrower and creditors. Timely resolution of stressed assets that could ensure maximum recovery from these assets was a key element of the Code.

Simply put, IBC helped in the creation of a mechanism to resolve the deadlock between stressed borrowers and lenders, made defaulting companies more conscious about debt, and gave lenders a tool to maximise their recoveries.

Yet challenges persist

Even after seven years since the launch of IBC, the recovery of loans resolved through insolvency courts remains low even as the number of cases being admitted is on the rise.

A September 2023 report by the ratings agency CareEdge showed that the number of cases in April-June FY24 jumped to 6,815, compared to 5,250 in the corresponding quarter last year. In the same period, data from some of the top lenders showed that recovery has been following a downtrend on a year-on-year (YoY) basis.

For example, the State Bank of India (SBI) recovered Rs 3,607 crore, compared to Rs 5,208 crore last year. Recovery for Bank of Baroda (BoB) fell to Rs 2,600 crore from Rs 3,014 crore in a year. In other words, the country’s insolvency mechanism has largely remained ineffective when it comes to the actual recovery of funds.

Experts too have pointed to an inefficient recovery pattern through the IBC.

"There is a need for development in the debt recovery system in India. Even after the presence of the National Company Law Tribunal (NCLT) and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), the efficacy of the legal system is not right," Deepak Parekh, Chairman, HDFC Ltd, said at the Global Fintech Festival in Mumbai on September 7.

Also read: Debt recovery remains a challenge in India, says Deepak Parekh

Capital infusion of PSBs

India’s public sector banks (PSBs) saw capital infusion thrice in the last 10 Union Budgets. First, in the 2014-15 Budget, a capital infusion of Rs 2.40 lakh crore as equity by 2018 was announced. Further in the 2016-17 Budget, an infusion of Rs 25,000 crore in PSBs was announced. In her speech on the Budget for 2019-20, Finance Minister Nirmala Sitharaman said that PSBs will be provided Rs 70,000 crore.

In February 2021, Sitharaman announced a capital infusion of Rs 20,000 crore in PSBs for the financial year 2021-2022. In March of the same year, the government announced a capital infusion of Rs 14,500 crore in four PSBs through zero-coupon bonds.

PSB privatisation—a work in progress

The proposal to sell the holding of the government in IDBI Bank was announced in the Union Budget 2020-21. Accordingly, the government, which owns over 45 percent stake in IDBI Bank, and state-owned life insurance behemoth Life Insurance Corporation of India (LIC), which has a 49.24 percent shareholding, have jointly decided to sell a 60.7 percent stake in the lender.

The government said it will adopt a two-stage process for the divestment of the lender. The first stage involves the due diligence part where bidding will be performed. Post this, eligible bidders will be shortlisted through a rigorous process and the financial evaluation of bids will be done. This will be the second step that will culminate in the actual strategic sale. As per reports, the list of bidders includes Kotak Mahindra Bank, Prem Watsa-backed CSB Bank, and Emirates NBD.

Also read: Lenders welcome Modi's call for banking sector reforms

However, beyond this, there is no progress on the privatisation plan of state-run banks.

Asset quality review

In late 2015, the Reserve Bank of India (RBI) under Raghuram Rajan, the then governor undertook an asset quality review (AQR) of banks. The central bank’s action came after it found discrepancies in banks reporting their non-performing assets (NPAs).

Data from banks showed that the NPA of the banks jumped to Rs 7.2 lakh crore after the AQR from Rs 3.5 lakh crore before the AQR. Some of the largest offenders include banks like Indian Overseas Bank, Axis Bank, IndusInd Bank, IDBI Bank, State Bank of Mysore (merged with the SBI), and State Bank of Travancore (merged with the SBI).

On the other side, AQR also worked as a game changer for PSBs stuck with huge bad loans. The gross NPAs of PSU banks declined from 14.6 percent in March 2018 to 5.53 percent in December 2022.

Here, industry experts highlighted that AQR helped banks to understand recovery and write-offs better.

“AQR helped in the streamlining of operations for banks. And after AQR, it can be seen that banks had more clarity on how to work around recovery and write-offs of bad loans,” said Chandan Sinha, former executive director of RBI.

Demonetisation in 2016

On November 8, 2016, Prime Minister Narendra Modi appeared on national television and announced that all Rs 500 and Rs 1,000 notes would become invalid at midnight. The announcement at 8 pm, aimed at flushing out black money — money hidden from the taxman, led to nearly 86 percent of the currency in circulation becoming invalid four hours later.

R Gandhi, former Deputy Governor of RBI, said that the indirect object about integrating digital payments data has taken off in a much more effective way of course.

For example, the Unified Payments Interface (UPI), developed by the National Payments Corporation of India (NPCI) has become ingrained in urban daily life, representing more than 78 percent of total retail digital payments in India as of May 2023. In October 2023, UPI crossed a whopping 11.4 billion (1,140 crore) transactions, setting a new record with transaction value surpassing Rs 17.6 lakh crore. Similarly, the recently launched Central Bank Digital Currency (CBDC) has the potential to transform digital transactions.

Merger of PSBs in 2019

On August 30, 2019, Sitharaman announced the merger of 10 PSBs –Punjab National Bank (PNB), Canara Bank, Union Bank of India, Indian Bank, United Bank of India, Allahabad Bank, Syndicate Bank, Corporation Bank, the Oriental Bank of Commerce, and Andhra Bank – under four entities.

Charan Singh, Non-Executive Chairman, Punjab & Sind Bank said that having a large number of banks on a single street, competing with each other did not serve any purpose.

"It is always better to have four or five nationalised banks, as they don't compete with each other on every street, they do compete with each other in different areas but these are universal banks with a niche area that they have," said Singh.

Years after the mega-merger, PSBs are well-capitalised and reporting record profits and growth. Amid turbulent market conditions marked by high interest rates and inflation, the Nifty PSU Bank Index tracking the performance of PSBs has surged by a noteworthy 52 percent over the past year. This is far higher than the Nifty Bank Index’s 12 percent gain in the same period.

Shares of PSBs such as UCO Bank and Punjab & Sind Bank have given astonishing returns of over 223.20 percent and 178.70 percent, respectively. Bank of Maharashtra and Central Bank of India have also gained significantly, rising 140.04 percent and 122.70 percent, respectively.

What to expect for banking in Budget 2024-25?

Industry experts said that the coming Budget 2024, which would be the government’s last before the General elections next year, will not see any significant reform for the banking sector.

Singh of Punjab & Sind Bank said that an interim budget cannot have a longer policy put into it due to its nature. "It is always a stop-gap arrangement as it is interim in nature so one should not look too much of a policy into an interim budget," he said.